25 Feb Severance, pensions and unemployment

Q. If I get “laid off” but I get 10 months’ severance pay issued in one lump sum eight weeks after exiting, am I eligible for unemployment? Also, I have a pension that I can start to receive immediately, but my pension is not high enough to pay my bills and I need another job to survive. I’m in my mid-50s.
— Need options

A. Your best bet is to make an appointment at your local unemployment office to discuss all the particulars of your case because it’s possible you didn’t include something that might be important to your benefits.

Note that if New Jersey ever determines it has paid you benefits in error, you will be the one responsible for paying it back to the state.

Also note that the rules we discuss here are for New Jersey only, and the rules can differ by state.

Let’s start with your severance pay.

If it’s classified as severance pay, you would be eligible to start collecting your unemployment benefits immediately, said Mike Cocco, a certified financial planner with AXA Advisors in Nutley.

But if your severance is classified as “continuation of salary,” that would preclude you from collecting unemployment benefits until your severance has completed, Cocco said.

“`Continuation of salary’ would be compensation that you would continue to receive even after you have been `laid off,’ but is still contingent on finishing a project for the company, for example,” he said. “When looking at only the severance pay aspect of your personal situation, you would seem to be eligible to collect unemployment benefits immediately.”

Your pension, however, is a different story.

Cocco said if a person collects on a pension from the employer that they were just laid off from and that person seeks unemployment benefits, the benefits may be reduced, according to the state Department of Labor.

“If your pension in question was 100 percent funded by you as the employee with no employer contributions, then your unemployment benefits would not be reduced,” he said. “If you and your employer both contributed to your pension, a portion of your unemployment benefits may be reduced.”

And if your employer contributed to the entire cost of your pension, your unemployment benefits would be reduced by 100 percent of your weekly pension amount, he said.

The term “pension” not only includes the traditional defined benefit pension, but also includes withdrawals from that employer’s 401(k), Cocco said.

“An option you might want to consider would be to roll over that 401(k) into an Individual Retirement Account (IRA), and then take your withdrawals out of that account, as that would not be considered an employer pension plan any longer,” Cocco said.

Social Security benefits do not affect your unemployment benefits and your eligibility to collect them.

Sheri Iannetta Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown, agreed that severance pay shouldn’t impact your unemployment benefits.

She said given your young age, you should treat your pension carefully, even if there’s no impact on collecting benefits.

“If you start to receive pension benefits before your full retirement age, the size of your monthly payment is less than if you waited,” she said. “If you are lucky enough to find a new job quickly, you may have preferred to leave the pension growing until you need it later in your 60s.”

Again, we recommend you meet with a rep from the unemployment office to look at the particulars of your situation.

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This story was first posted in February 2016.